Velocity Composites plc (VEL.L) Earnings Call Transcript & Summary

Good morning, and welcome to the Velocity Composites plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it received during the meeting itself. However, the company can review all questions submitted today, and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Andy Beaden, non-Executive Chairman. Good morning, sir.

Good morning, everyone. Thank you for joining us at our 2023 results conference. And today, we'll be looking back on the 2023 and the highlights. And then we'll also be looking forward for 2024 and giving a very detailed update of our new facility in the U.S. and how that is going. So back to 2023, we achieved 37% growth, predominantly through the U.K. with a little bit of the U.S. benefit coming through. You'll see that for 2024, it's more U.S. growth than U.K., but both those market factors are showing underlying growth as well as the benefits of new business that's already been won. We've covered before about the -- our new facility in the U.S. and new contract, and we're going to go -- Jon is going to do a deep dive on where we are on that, particularly the regulatory side, approval side. You will have picked up that we have adjusted and shifted some of our forecasts for '24-'25. That simply is around the timing of some regulatory approvals. It actually has no impact on profitability because we have won some other engineering business and our costs flow with the size of the business. So you will see that there is the top line adjustment to GBP 27 million plus for this year and GBP 33 million plus for next year. The pluses are if and when we win new business, and then that stacks into that -- the bottom of those ranges are the business we already have contracted. As we've said, we've had a very successful, we think, year in terms of standing up the U.S. facility. Our customers are very happy with what's going on there and how things are advancing. I'd like to point out that, that transfer of knowledge and of programs for a regulatory approval process is probably the biggest industry has ever seen for one facility, and it lays a significant marker in the industry to show our own capabilities. And it's very important that our customer is happy, which they are, and that has been our key focus and remains our key focus for this next year. So as I said, our forecast for this year in terms of top line is another 65% growth to GBP 27 million. The margin last year was impacted through learning curve set up in the States, some lag in inflation pass-through. All those items correct themselves through this year. And I expect in the second half of this year when all this regulatory approval is sorted out us to have a very strong second half of the year, which will propel us into profitability and a good strong 2025. So I'll now pass it over to Jon, who's going to do a deep dive in some of the U.S. aspects.

Thanks, Andy. Obviously, you know us, the presentation team. For those new to the story, new to the company, just counter through some of these introduction slides. So ultimately, we operate in the composite materials market, predominantly in aerospace, and this is supporting the transition from metallic aircraft to composite aircraft, and the quite well-known platforms out there now, which are pretty much like you can see on screen, like 787 there, predominantly full composite aircraft. As you can see, the shift from metallic to composite aircraft has begun predominantly around twin aisle, but also moving into single-aisle, and that's what's driving the growth really to support sustainability as air travel needs to be net zero, but also support efficiency around fuel range and the usual drivers around air travel. As you can see from this chart, as we've talked previously, not only if you got a significant growth of composites within aircraft, but also the fleet size is looking to double over the next sort of 15 years or so, ultimately underpinning huge growth within the use of composite materials. And what Velocity does, just as a reminder, is we sit between the raw material manufacturers who are all well-established huge international organizations producing pretty much single source material into these large platforms. We see between them and the manufacturers who use those materials to manufacture composite parts for aircraft. And we use technology to drive huge demands with efficiency through material consumption, reduction in wastage but also reduction in process times around both the structural kits, the actual flying carbon fibre kits, hopefully you can see my mouse there at the top structural product, and then also the process material kits as well. So Velocity's aim is to give our customers one kit of everything they need to make a part. And why we can be more efficient and where we've invested to drive that efficiency is around technology. So Velocity has fully digitized the process around the material ordering. These materials have a very long lead time, 6 months up to. The material themselves are [ uncontrolled ] so they need to be controlled. So there's a lot of technology that's been developed to align that long-term demand to the near-term consumption on behalf of our customers to ensure that we have just the right amount of material just in time. Then also a lot of technology development around the consumption of those materials in the kit manufacturing process to drive material efficiency a lot higher as well to make sure that much more of the material ends up flying on the aircraft. So our full digitized process allows us to drive that efficiency both from process times and material. And where we sit within supply chain, as we say, lots of large, fully established material suppliers, lots of large fully established part manufacturers and OEMs. And we sit between those managing all those processes, you can see there on the right, everything from, as we say, the raw material ordering, inventory management, demand management right away to getting material in, controlling the life and the batch of that material, streaming them into the kit manufacturing, manufacturing those kits in the most efficient way and then managing the distribution of those kits right away to the lines side and our customers. And we benefit from and the whole industry benefits, a lot of flow down material pricing control. And it really is all about making sure, as we say, as much as that material ends up flying as possible. I'd like to hand you over to Andrew now, who will take you through the financial summary of FY '23.

Yes, FY '23 was in line with the forecast that were made, sales at -- revenue of GBP 16.4 million, as Andy has said, up 37%. And EBITDA loss of GBP 1.6 million. At the end of the year, we had cash at the back of GBP 3.2 million. The fund raise was completed in October '23, and that generated net GBP 6.1 million of cash into the business, which was obviously used then to support working capital in particular during the balance of the year and also reduced the usage of the IDF facility and pay down our loans as well. Next slide -- moving on to the next slide. As we mentioned, revenue, 37% higher. The U.K. grew still 20% during the year, and the U.S. contributed GBP 2 million of maiden revenues for the year as well. So U.K. performed well as well as we're seeing the sort of ramp up in production in Europe through Airbus, Boeing. Margins were impacted by the sort of start-up of the U.S. operation. Obviously, volumes were low, and we didn't get recovery of labor plus, obviously, additional material spend in going through that period. That impacted the margins by about 3%. U.K. margins were slightly lower than last year as a result of a sort of lag in inflationary price increases. As Andy mentioned, we expect that to recover this year. Significant increase in administrative costs largely obviously through building out the U.S. site and getting the people and resources on board. A combination of mainly that, some increase in the U.K., a small increase in the U.K. and additional depreciation costs through the fit-out. So the loss before tax, I mentioned, gained minus GBP 1.6 million. But obviously, the build-out of the U.S. facility, in particular, puts us in a very strong position for FY '24. Next slide. In terms of the balance sheet, obviously, significant investment in property, plant and equipment and also in development expenditure to get the facility working during the year. Inventories have gone up significantly again compared with FY '22. The majority of that is the U.S. [ 900,000 ] of that increase was U.S. stocks, which will be built up to meet the demand. Trade debtors remain tightly controlled in the business, small increasing debtor days, but the cash increase was largely, again, driven by the U.S. payables. We have a 120-day payment terms with the U.S. customer. So that reflects in a significant increase in our trade payables as a result. And during the year, we paid -- repaid about GBP 1 million of CBIL loans and leases, which obviously came out with cash. Next slide. In terms of the cash flow, I talked about a few of these moving parts already. The GBP 2.1 million investment in -- essentially in the U.S. around property, plants and equipments and the development expenditure. I've already mentioned also the CBIL loan and finance lease repayments. The net cash position as you see below includes well, pretty much very little on the invoice financing facility in the U.K. that provides us with about probably at the moment, about GBP 1.7 million of additional headroom on our cash position. The U.S. debtors go through prime revenue, which is provided by the U.S. customer, and we're able to draw down on those quite quickly. As a result, the financing costs of that are built into the margin that we generate. So we've got that covered. Next slide.

Thanks, Andrew. So looking at the sort of progress through the year, I think previous sort of presentations we've had, there's been obviously a lot of interest in terms of where we are in the U.S. So I just wanted to set out in a bit more detail the current state of progress there. So clearly, big projects with a launch customer. And as we announced back in July, there's quite a detailed regulatory -- well, regulated transfer process that's taking place in order to ensure that the transfer of the kit manufacturer from our customers into ourselves is done both to their approval, but also their customers' approval in terms of the OEMs. So just to put some numbers around it. There's over 1,000 kits in total to get through this process. And each OEM will have slightly different requirements. But essentially, those kits will need to achieve the OEM approvals. We'll need to submit a transfer plan that's acceptable to both our customer and the customer's customer. We'll then need to manufacture the first kit, get that bought off both from a desktop point of view, but also to actually get that first kit into the customer for buy off physically on the production lines, deal with any issues that arise around any of the data transfer. And then obviously, once all that is complete, we'll then look to ramp up production and transition from our customer into ourselves. So all that's quite a very detailed process, and we've talked about it a little bit before in terms of how that works. Potentially, as of now, we're around 65% away through that in terms 65% of FY '24 revenue programs are under full rate production. So they've completed all that process and its entirety, fully signed off and are at full rate production from Velocity Composites in Tallassee. So again, that's a huge achievement through the year. Those significant volumes going through now is a testament to all the hard work, not only the team in the U.S., but the team in the U.K. that supported that and close cooperation with a customer to get those programs through. And that work continues, of course. So the remaining work, 32% of that and FY '24 revenue is now under various stages of that transfer process. So 8% of that, so that's 8% of the [ 32% ], it's 8% of the total, that consists of 197 kits, and that's currently being cut and tested. So that's the sort of final end of that process. As you can see, I'll put the number of kits in there. So you can sort of see that it's not a linear curve. Some kits generate more because they're more expensive, they're bigger and also they're of different production rates. So the kits, the number of kits is one measure, but again, it's also the amount of revenue that, that generates in FY '24. So that's how the first 8% is going through. The next 25% of that 32% is only 80 kits. So again, slightly different program, but much less kits driving much higher revenue just because of the volumes that are involved. But that's currently going through OEM approvals. So the OEM has been audited several times through different parts of their organization, and all the paperwork is ready to launch the more detailed kit cutting part of the FAI in the very near future. That will complete and scheduled to complete by April. And that's why some of the revenues are part of revenues in '24, generating full revenues in '25. So that's been, as I say, a huge, huge effort. It is a very, very intensive process with a new team. But again, thanks to all the hard work of the wider Velocity team in making sure that knowledge transfer was successful, the customer liaison was successful, the OEM liaison, all that really drives the transfer of these kits from customary to us. On top of that, just some other activities. So again, with the strength of the relationship, we've got all FY '24 pricing agreed. Any inflationary costs, material price changes have all been agreed and put through. Just to give you a bit more color in terms of the scale, the current amount of business plus the current amount of FAI is currently being done on 2 shifts, 5 days a week, with 3 machine cells. So going forward, we can expand that by increasing the number of machine cells. And ultimately, there's always the third shift. But there's currently 3 machine sales running in Tallassee, there's obvious and immediate capacity for 6 cells. As Andrew said, there will be other machines brought in through the year to support that, but plenty of capacity within the facility itself. And then the final 3% of FY '24 revenue that's transitioned into more of a service charge rather than in kits, so it protects the margin where that just completes the 400% of the transfer. And as I said, full rate in FY '25 at the current production rates being forecasted. We're looking at GBP 16.7 million of sales from that launch customer in the U.S. facility. So good progress, huge effort through the year for the whole team, and it's really pleasing to see a completely new site, in a new part of the world operating to the Velocity processes and procedures. And so looking forward, in terms of our focus through this year, clearly, completing that project still becomes and maintained full priority in terms of making sure that whole transfer completes, working with the customer, the OEM and the Velocity team to ensure that happens. And also, as Andrew said, some of those inflation lags as contracts renew, it gives us a chance to update those with more later -- more recent thinking around things that need to be within those in terms of examples like labor inflation, energy inflation, exchange rates, those sort of things. So again, we get that completed this year in terms of commercial and aspects of the existing business. We -- thankfully, we benefited from Andrew's experience since July this year on an interim basis, but we've done a lot of work in terms of identifying a full-time CFO with a lot of experience, including on AIM and look to be able to update people shortly on that. And then really, as we've talked previously through the year, continued focus on top of the existing business or new business. So we've spoken previously about more business with existing customers in Europe, and then also the winning of new business in -- new customers in the U.S., which continues and continues to pace. So really with FY '24, that revenue of at least GBP 27 million will be updated and will be higher with any new business wins. And really, again, looking at another significant increase on FY '23 revenues in FY '24 and building that momentum as the industry grows back. Summary...

So again, key points, 37% growth this year, which only includes a couple of million in the U.S. -- U.S. facilities stood up, 65% of the programs have been transferred over and qualified, and that will lead to the GBP 27 million that we're forecasting for this year, GBP 33 million for the current business that we already have for 2025. Some of the fundraise we have just used to temporarily pay down our working capital facilities because no point paying interest and having cash on the balance sheet, and we'll cover that in a minute, I think, from the questions because I think someone has spotted that the cash is less than the GBP 6 million that we raised, and we'll come back to that, how we utilized that cash. But mostly, it's still available for use and it's being used now for expansion in the current year and next year. And overall, we believe that we have a very solid next 2 years of underlying base growth, doubling the business again by the end of '25 without winning any more new business. So I'd like to thank you for listening to our prepared presentation and the next stages, so we're going to move on to look at the Q&A and answer those.

Andy, John, Andrew, thank you very much for your presentation. [Operator Instructions] Jon, could I please ask you to read out the questions and give responses where it's appropriate to do so, and I'll pick up from you at the end?

I'll take care of that. First question is simply asking, what confidence do we have from the GBP 30 million to GBP 36 million revenue guidance and achieving profitability? And what the visibility is on that and variables? So just to repeat, and it may now have been answered to -- from the presentation. The GBP 30 million to GBP 36 million is the full rate value of our current business that we already have. So the only challenge we have is the transfer of that business from GKN. And we don't expect demand in the U.K. or the U.S. to fall from the current expectations, and the long-term prediction for those contracts is the demand for them will continue to increase for the different programs that we are working on with our customers. So we're pretty confident that, that is the current level of demand for the current level of business that we have and applying the margin that we believe that, that can generate, which is at least 25% that, that should deliver a sustainable level of profitability and also cash flow. So we're aiming to be cash neutral to positive from now on, even though we're growing now at this rate. So I hope that covers that first question. In terms of risks, by the way, and I think we've mentioned this. FX, obviously, can always change things. Though our risk is the dollar and that is a strong currency. And the other thing is, I guess, a major event of some kind of like we saw with COVID in the past. The next question, which I'm going to cover here, yes, is that someone has said that they're surprised about that we have exhausted already our cash that we raised last year. Now, we are in a net cash position and net of our debt. We have paid some of that debt off, and we've also paid down our revolving credit facility in the U.K., which we can redraw, which is worth GBP 3 million as well as we have facilities in the States as well. So though the amount of cash on the balance sheet looks a lot less than what we raised, that's because, as I said before, we paid down some debt, both year-on-year and from the half year to -- if you look at the half year position to the full year position. And that's really just leaving our powders dry. And clearly, we can redraw that revolving credit facility when we want, but there's no point incurring fees at the moment. And the return on interest for the money just sat in the bank is less than paying down these flexible working capital facilities. So that's where we are with that, and we also expect to be cash generative. So yes, we put some of that money to work, upfront in working capital and other areas. I think we've brought forward a bit of materials, which saves us some money in the second half of the year. And all that comes back into the bank accounts in the second half. The next question we've had is just a prospect, the second customer for the Alabama facility. We have mentioned a few things in the RNS. So Jon, do you want to just give a little bit more about -- we're obviously restricted on in NDAs and other areas on what we can actually say at the moment.

Yes. I think we covered previously that we want to make sure that we're working with other customers close to that facility. And so what we're doing really is focusing on customers nearby, one of which is progressed into full and detailed bids under an MOU, and that is progressing as well. And then the second -- third customer, if you like, from potential customers from that facility, it's just about getting to a point where we have all the information to release a bid. But against different -- being in different scales, these are the larger opportunities compared to perhaps what we've done in Europe, and we want to make sure that they're right and they're a full TCO business case. So it's not just a case of far in pricing. These are detailed close collaborative bids where we've understood the current state and work through a detailed future state with the customers.

Yes. And just someone else has elaborated on that, asking about the same question and then also picked up these contracts roll over, Jon. And maybe explain that like the current big contracts in the States is 5 years, but you'd expect that -- why you'd expect that just to roll over. And also that facility has expectations to grow, doesn't it?

Yes. So for all our current contracts have provisions in them for normalized rollover, if you like, because the nature of the work is that the supply needs to continue, and you can see with the regulated transfer process, there's no room for sort of unplanned change. So I mean, looking at all our existing contracts, they're all rolled over in at least once, some of them multiple times. And that's really what we're saying in terms of the sort of one customer that we get to roll over and get those new provisions in there for inflation. So yes, the expectation always is it has to be a rollover or a very long and detailed handover process. And the start of the next rollover has to take into account material lead times as well. So we often start negotiating the sort of rollovers a year, 9 months before the contract is due to end.

Yes. So we've got a series of customers, which came from the U.K., which are global. And clearly, we continue to explore additional business or additional facilities with them. And then we have a number, several very, very large U.S. concentric customers, which are as large or larger than any of our current customers, naturally, U.S. being the biggest market for composite aerospace. And they're the ones that we're mentioning either under memorandum of understanding or working on a business plan with. For them to -- for all our current customers and the 2 we're talking about to outsource everything they've got, you're talking hundreds of millions a year. So we have enough within our sites based on our current customers globally and several new customers that were in detail discussions and negotiations with to make this a very significantly larger business than it is today. And I think that answers a couple of the other questions around business development. One person in particular said, well, how do we forecast our revenues. So the current revenues we're forecasting are contracted based on current production, but many of those programs are forecasted to increase in size, plus a lot of our deals that we strike now are looking to say, we will take over everything from that facility. So if that facility wins new business, we win the new businesses as well plus as well as the forecast increase in demand, which will come through the current contracts based on program demand for different platforms long term. These new customers that we're working on give us a wider portfolio of opportunity long term for growth. So the biggest single driver at the moment is running new business, but the long-term driver is the trends in the industry around the use of composites with us having the underpin of these long-term relationships and contracts. And that covers about 2 or 3 other questions that came through. Someone has asked about inflation. And we're moving all customers to a contracted inflation adjustments that would happen once a year for main -- for nonmaterial areas, so labor and energy and other areas.

And interest rates.

Interest rates as well. And then for material costs. Jon, how regularly do they correct?

They're normally done annually as well. They are and always have been contracted because the material flows through, the material pricing, sorry, flows through us. So we always have the ability that should a material price change. It's all single source. It's all novated supply. So that price change flows through us to our customers, and that's pretty well established from day 1. I think with the recent inflation issues and particularly with them all happening simultaneously, that's something that we've got into contracts as they renew to ensure that there's a sort of fair and equitable protection there in terms of managing those costs.

Someone asked, noted on the going concern statement that it says that we would, in some months, potentially use our invoice discounting facilities. Andrew, do you want to elaborate on that in terms of where -- is it every month? Or is it just sort of as we grow and then we generate the cash and pay that back?

I think the use of the IDF is very much short term at the moment. If we need to use it, it will be over the next few months as we -- the volumes start to increase. As Jon mentioned, we're going through this final FIA process. So the revenues are going to increase into the spring. And when we get into that space, then we start to generate cash. So it's very much, as I see it, a short-term usage at the moment, but the facility is there if we're looking for some additional expansion. We built into the forecast, the CapEx requirements to complete the build-out of the Alabama facility with additional cutting machines. As Jon has mentioned earlier, we've got capacity to get up to 6 in there. I think we're planning to move from 3 to 5 over the next 12 months, which will provide with substantial opportunity for second customer and third customer volumes to go into that plant.

Brilliant, because that's the second part of the question, which I was going to put to you, which was, do we then -- have you built in or do we have the money to pay for the CapEx if you're using it for working capital? And the answer is, yes, we do. You've built -- when you're looking at that expansion plan of the current facilities, you've built in quite a significant CapEx to bring on board a second or third customer through our current facilities, is what we're saying.

Correct.

Yes. Brilliant. I mean someone has just asked a question about, obviously, the industry is very long term in new aircraft. And does that mean that we are most -- we're being speculative on our growth opportunities? And again, I'll just repeat, our growth forecasts and opportunities are about current programs, which are already on the slate. And doing more of those from our current customers or a couple of new customers, we do believe long term that there will be other programs, other aircraft, and they will have more composite content. That isn't in our forecast. That's something that's an upside for the company over a longer period of time, but that's not -- so we're not being speculative in what we're forecasting going forward in terms of new programs in the sense of a new aircraft.

Yes. I do think it's just worth covering now. In terms of military, because I think David Des has asked the question as well there. Military, pretty much all composite already just because from a performance point of view. With civil, we saw from some of the previous slides, in the appendix slides, there's already been a transition for the twin-aisle long-range aircraft and then clearly, as single-aisle platforms are replaced. And again, there will be a large focus on composite structure, even if you look at something like 777, that's just coming through its mid-life update, they've taken that opportunity with the 777X to put a composite wing on an existing platform. So I think everything we're hearing and the industry is saying that the composites is where it's at in terms of performance, both clearly in military, where cost is less of an option, but also in civil where it's all about performance and efficiency. And then linked to that is the sort of transition of proportion as well. We're seeing a lot more discussion and research and development around alternative to standard kerosine aviation fuel. So you've got electrification at one end, hydrogen in the middle and sustainable fuels the long range. So I think all that points to aircraft needing to be more efficient, needing to go further on less fuel, whatever that fuel may be.

All right. Well, that's all the questions that we've been asked. Some cuts across each other. Hopefully, we've covered those. And maybe just sum up on those questions that as Andrew explained, yes, we are using up some cash at the moment, but we will then start to generate cash in the second half of the year. Yes, we have built in the CapEx requirements to further expand our facilities to meet, hopefully, additional demand and new customers in the current facilities. The forecast are based on our contracted revenues, which our customers already have the business for. And I think we've achieved a great deal in terms of setting up our largest facility or it will be a large facility in the States remotely in a highly regulated markets. And I would express that this gives us a huge moat. There's no one else doing what we're doing. There's a great demand for the efficiencies and the services that we provide. And we have some very large, major new customer opportunities. And they simply wouldn't be talking to us if they didn't see us as a credible business. So we believe that we have, in the last 12 to 24 months, created a very significant asset, which has superb growth opportunities. The fundraise really helps ensure a nail down that we can move into profitability, which clearly is important from a credibility point of view with investors. And just to remind people, we are, ourselves, investors in this business. Jon is the largest shareholder. I bought in myself and all the management actually sacrificed voluntarily 20% of their base pay in exchange for equity each year. They don't have to do that. It's not extra to their normal pay. There is an LTIP, like all companies do have that's separate to that on incentives and targets, but that is something that people feel they're prepared to do because they really believe in the long-term value of the business. And I'm not sure if there are any other companies even on the AIM, where all the management actually do that on a voluntary basis, which I think speaks volumes of where we believe this company will go to in the next 2 to 3 years, let alone 5 to 10. So thank you all for listening today. We're always open for questions, and we have organized a number of the shareholder visits over the last year, and we'll continue to have that open door policy and support for smaller shareholders as much as large institutional ones. So thanks again. And thank you, Jon. Thank you, Andrew, for all your support over the last 6 months as well, stepping in, doing a fantastic job. And we're very confident we should be able to onboard a new full-time CFO, which is very experienced, both in manufacturing and the AIM.

Andy, Jon, Andrew, thank you very much for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Velocity Composites plc, we'd like to thank you for attending today's presentation, and good morning to you all.